Half-year Report to 30 June 2018

On track for another good year

“Our strategy is to continue to grow our combustible business while investing in the exciting potentially reduced risk categories of THP, vapour and oral. As the Group expands its portfolio in these categories, we will continue to drive sustainable growth.

In the first six months of 2018, the Group continued to perform well. The cigarettes and THP portfolio has outperformed the industry as market share grew 40 basis points (bps) with a tobacco price mix of approximately 4% which is expected to strengthen in the second half of the year. The performance of Reynolds American Inc. (RAI) since acquisition is encouraging and the Group’s diverse NGP portfolio has grown strongly.

The foreign exchange impact on the Group’s results was a headwind of 8% for the first six months of the year and is estimated to be 5-6% for the full year, based upon the current foreign exchange rates.

Despite the recent slowdown in the THP category in some markets, including Japan and South Korea, we remain confident of exceeding £1 billion of reported revenue in NGP in 2018 as we expect a range of new launches to re-energise growth in THP in the second half of the year. We anticipate another good year of adjusted earnings growth at constant rates of exchange”.

Nicandro Durante, Chief Executive

KEY FINANCIALS

Six Months Results – unaudited

•  On an IFRS reported basis, due to the inclusion of the results from acquisitions completed in 2017, notably RAI (contributing approximately 40% to revenue and profit from operations), which was partially offset by a translational foreign exchange headwind of approximately 8%:
  •  Revenue increased by 56.9% with revenue from the strategic portfolio up 128%;
  •  Volume from cigarettes and THP grew 11.0%;
  •  Profit from operations was up 72.4%; and
  •  Operating margin increased 340 bps to 38.1%.
•  On a representative basis (as if BAT had owned RAI and the other acquisitions, completed in 2017, from 1 January 2017, and defined on page 3 of the attached full announcement.):
  •  Cigarettes and THP volume fell 2.2% to 348 billion (including 3 billion of THP), outperforming the industry which is estimated to be down 3-4% in the first half of 2018;
  •  Cigarettes and THP market share¹ in the Key Markets² increased by 40 bps driven by strategic cigarette and THP volume growth of 11.7%;
  •  Adjusted revenue, at constant rates, increased by 1.9%, driven by robust price mix (4% on cigarettes and THP, which is expected to strengthen in the second half of the year as the impact of Pakistan and GCC unwinds);
  •  Adjusted revenue would have grown by 2.6% on a representative, constant currency basis, excluding an estimated £89 million of revenue recognised by RAI in the first six months of 2017, largely related to the sale of inventory associated with the international brand rights of Natural American Spirit;
  •  Revenue from the strategic portfolio (defined on page 3) was up 8.5% on a constant rate basis, driven by a 5.0% growth in revenue from the strategic combustible brands and the growth of THP revenue (up over 750% at £305 million) driven by glo in Japan;
  •  Adjusted profit from operations grew 2.4% at constant rates as the adjusted revenue growth was partly offset by increased investment in NGP; and
  •  Adjusted operating margin, at current rates, grew 50 bps.
•  Basic earnings per share fell 3.4%, with diluted earnings per share 3.3% down, as the net effect from the inclusion of the operating performance of RAI was more than offset by higher financing costs, an increase in costs associated with the amortisation of acquired trademarks, provisions for tax claims and the foreign exchange headwinds;
•  Adjusted diluted earnings per share rose 10.4% at constant rates of exchange; and
•  The next quarterly dividend payment of 48.8p will be paid in August 2018, as part of the previously announced interim dividend of 195.2p per share which is payable in four equal instalments.

The Group expects foreign exchange to be a headwind on the full year financial results of approximately 5-6%.